Analysis of SOE listings in emerging markets

State-Owned Entities (SOEs) play a significant role in the global market, accounting for between 13 to 22 percent of its value. While most SOE listings have traditionally been in advanced economies, there is a growing interest in exploring the potential of listing SOEs in emerging markets to deepen local capital markets. Anika Nerlich, Associate Financial Officer at IFC, shed light on the complexities and opportunities in this space in a recent interview with CNBC Africa. Nerlich emphasized that listing SOEs in emerging markets could provide a valuable solution to enhance market breadth and depth. However, she noted that there are several preconditions that need to be met for successful SOE listings. One crucial factor is the profitability and commercial viability of the SOEs, which may require government intervention and restructuring before they are ready for listing. In addition, the presence of a robust domestic institutional investor base, such as pension funds, is vital to absorb the listings effectively. While privatization is often debated in the context of improving SOE efficiency, Nerlich highlighted that bringing in strategic investors can also drive the restructuring process effectively. She cited the example of Argentina's successful restructuring of YPF, a major oil company, without complete privatization. The key lies in ensuring the right sector reforms are in place, including strong regulatory frameworks and market competition, to support profitable operations. The conversation also touched upon the challenge of enhancing the investor base for SOE listings, with discussions around prescribed assets for institutional investors like pension funds. While prescribing investment avenues can stabilize prices and ensure absorption of listings, Nerlich emphasized the importance of allowing investors to make independent decisions based on risk analysis. In terms of potential sectors for SOE listings in emerging markets, Nerlich pointed towards industries like airlines and telecom companies that remain largely state-owned across the continent. She highlighted the untapped potential in these sectors for future listings, provided the necessary restructuring and profitability criteria are met. Beyond equity listings, the discussion also touched upon the role of bond markets for SOEs to raise capital. Nerlich noted that while listing equity can enhance access to bond markets due to improved transparency and governance levels, bond market participation alone may not drive significant restructuring or ownership changes within SOEs. Looking ahead, the IFC sees a role post-COVID in supporting the listing of SOEs that align with their mandate to develop the private sector. By working closely with governments on divestment strategies and providing minority equity investment where appropriate, the IFC aims to contribute to the long-term success of SOE listings in emerging economies. In conclusion, the potential for SOE listings in emerging markets presents a dual opportunity - to boost capital market development and enhance the operational efficiency of these entities. While challenges remain, a strategic approach involving government intervention, sector reforms, and investor engagement could unlock the untapped market potential of SOEs in the evolving global economy.